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Don't Prepay Your Mortgage [Consumer Reports]

Posted by dave_donhoff (dwdonhoff@hotmail.com) on
Wed, Mar 12, 08 at 12:42

Don't Prepay Your Mortgage [Consumer Reports]

From www.ConsumerReports.org

YOUR MORTGAGE;
It rarely pays to prepay

http://www.consumerreports.org/cro/money/credit-loan/prepaying-your-mortgage-3-08/overview/prepay-mortgage-ov.htm?resultPageIndex=1&resultIndex=1&searchTerm=mortgage pre-pay

Tiny-ized
http://tiny.cc/DontPrepay

Here is a link that might be useful: Don't Prepay Your Mortgage [Consumer Reports]


Follow-Up Postings:

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RE: Don't Prepay Your Mortgage [Consumer Reports]

If you are not going to invest that $100, it still makes sense to put it towards the mortgage.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Actually, if you dont' want to invest, then you are much safer & better off simply saving it aside in a regular savings account.

Only if you know you would CONSUME/WASTE it, are you better off paying it toward the mortgage balance.

Cash is oxygen... lock it away at your great risk.
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Don't Prepay Your Mortgage [Consumer Reports]

We paid our mortgage off early painlessly.

I know, I know, Dave... . But we were investing regularly all the while we were paying off our mortgage. And for US, knowing the note was paid was important.

I understand "number crunching" enough to know that looking at what the numbers DID historically may not be what the future will deliver. What if the money that was to be put toward the mortgage was invested in "dogs"? Just because historic gains happenED doesn't mean that the next decade/two will guarantee the same sort of return. Quite frankly, if the -hit hits the fan, we know the roof over our head is PAID for. And we can rent out rooms (again). ;)

We really LIKE having a home that is paid in full. We like the "paid in full" stamp. We also like to minimize expenses so we may send "our nickels out to play".


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RE: Don't Prepay Your Mortgage [Consumer Reports]

We worked to pay ours off early too... was the thing to do for US.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

This is an interesting point which I've encountered before. I find, though, that human behavior is not always as straightforward as a spread sheet-- I play tricks with myself to save more, as for me the best thing "in vitro" is not always the best thing "in vivo."


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Lol, that's a good one, Dem..


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RE: Don't Prepay Your Mortgage [Consumer Reports]

The comments here are how my Mother and I have felt for years and years. When we were younger we could see the numbers and it was financially better to pay monthly payments, but we still paid the mortgages off. I think it has to do with "feeling" secure. We were very poor when I was a child and always rented. Never had a home we could be proud of. Mom kept what ever we lived in clean, so we weren't considered trash, but I never want to go there again.


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RE: Don't Prepay Your Mortgage [Consume123r Reports]

I have always felt it should be paid off, but rarely have I seen so many that agree with that. My Mother and I have felt for years and years. When we were younger we could see the numbers and it was financially better to pay monthly payments, but we still paid the mortgages off. I think it has to do with "feeling" secure. We were very poor when I was a child and always rented. Never had a home we could be proud of. Mom kept what ever we lived in clean, so we weren't considered trash, but I never want to go there again.


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RE: Don't Prepay asdYour Mortgage [Consumer Reports]

sorry about the duplication, I was getting error after error and didn't realize it was posting in spite of the error.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

jonesy,

Have you found a way to double money as easily as that?

o j


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RE: Don't Prepay Your Mortgage [Consumer Reports]

I wouldn't prepay my mortgage if I bought at a younger age. I'd like to pay it off right around the time I retire which means I need to shave of about 7 years. I'd like to do the financially wise thing and don't have a need to pay off early as some people do for peace of mind. What do you think of this?

Thank you all! This site has helped me immensely!


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Hi Sonopoly,

I wouldn't prepay my mortgage if I bought at a younger age. I'd like to pay it off right around the time I retire which means I need to shave of about 7 years. I'd like to do the financially wise thing and don't have a need to pay off early as some people do for peace of mind. What do you think of this?

I think its a fine goal, and I think you're taking the right path in seperate accumulation to make the final payoffs at the point of retirement arrival (assuming all else is properly in place at that time.)

Best wishes!
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Don't Prepay Your Mortgage [Consumer Reports]

I think pre-paying the mortgage when saving little else is foolhardy, but for some it makes sense.

I'm funding my 401K and Roth accounts at the maximum allowed per year. That is a lot of money invested in (what I hope) is a balanced mix of equities, bonds, and international funds.

From there I have some additional money to sock away, but where? I guess to me investing in the ultra safe harbor of not paying my 5.75% mortage is attractive. At least it is a different investment than all the rest and while it carries inflation risk (I may be wishing I could borrow again at below 11% APR in a few years) it also ducks a lot of the risk that all my other funds have.

And pre-paying does have some ease of mind effect....so long as this is not a pipe dream.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

All I can tell you about is my experience as a Probate & Estate attorney. When a client dies, I don't find the stockbrokers and investment planners of whatever age with very large estates, nor do I find investors with portfolios full of brilliant investments, and my office is in an area where I should expect that.
The surprisingly large estates are people who have worked hard all their lives, paid off their mortgages, bought other real estate and rented it out; and/or put their money in banks or very conservative investments.

On the other hand, I see enough elderly people who had money and decided to "invest" it when they got older. I cannot imagine on what basis they selected their advisers but it must be on the basis of glib talk and free dinners at an "investment seminar" Unfortunately that is a riskier business than they imagined especially when they dreamed of beating inflation and being smarter than anyone else.
My advice would be to use your money in a way that is comfortable for you that you can understand. That may be paying off your mortgage and then putting the equivalent amount into the bank or stocks each month or into rental property that you manage and control. Handing it over to anybody with a clever idea is often a disaster.
I would imagine that David Danhoff has seen the same thing--clients who don't want regular normal investment ideas from a qualified, licensed adviser but will listen to a scammer with no qualifications. I recently had a client who is inheriting over a million dollars and somebody she calls an "investor" she knows from church is going to help her double it. Every single one of us knows how that will turn out--why doesn't she? I have tried talking with her, to no avail. But she is caught up in this idea of "beating the coming inflation" and is worried about taxes. Well she won't have to worry about taxes if she loses all of it.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Marge,
You are so right.

You dont' say if you do much proactive tax & estate planning, or if you're primary practice is in terminal settlements.

I have a tax-attorney affiliate (Scott Waage, on the west coast) who's primary practice is proactive design & structuring, with the prospective that a client's savings from implementation of an estate plan in its first year will strongly outweigh his service fees... and as you might imagine, he is STILL not "cheap." The clients I send to him, and the base he typically has, have accumulated net worth's $2MM and up (which is really not that much, including real estate, anymore these days.)

A great deal of defensive "equity balancing" I have learned from him... he is excellent.

Helping folks learn BALANCE, and avoiding the hype & drama... that's such the key today.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Another driving force behind paying off a mortgage are these ever decreasing savings account rates.

The recent fed cuts are likely to bring it down ever more.

In the mean time, mortgage rates don't seem to be dropping in step with those savings rates (so refinancing doesn't look interesting).

Paying down a 6+% mortgage looks more interesting to a lay person like myself... especially given the fact that most of my $ is sitting in a bank.

I just checked mortgage rates to kick around the idea of refinancing the mortgage.
First off: the rates aren't low enough.
Second: I don't know if i have the stomach to invest the money in a way that is likely to produce interesting returns...the market is twitching like crazy and that would drive me nuts (my IRA is enduring that motion... I don't need any more!)


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RE: Don't Prepay Your Mortgage [Consumer Reports]

I've been reading the thread here and the one on the real estate forum, remembering the linked piece about why it's better to carry a longer term mortgage. I think it explains the concept Don has been talking about.

Here is a link that might be useful: Reasons to carry a long mortgage


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RE: Don't Prepay Your Mortgage [Consumer Reports]

I know I might get grief on this one, but we paid off a 15 year mortgage in just under 5 years. We were still investing in our pension plans at work, just not putting money in the bank. We just wanted the peace of mind of having our house paid off. My husband is eligible to retire in November with almost 70% of his pension.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Here's another perspective.

Be sure to click on the link "My comments -- I just love getting on my soapbox."

This guy has a lot of interesting calculators and other info.

Here is a link that might be useful: Prepayment vs. invest calculator


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Dave--
Scott is in the San Diego area, I am in the Los Angeles beach area. I do Estate Planning, Trusts, Administration and Probate, but also Guardianships & Conservatorships. Its a big field. Thats where I get my information from looking at other people's investment records. Formerly I was a bankruptcy lawyer.
My reaction to not paying off the mortgage is that its a good idea to pay it off. Show me anybody that actually took the money they would have spent on the mortgage who invested it intelligently and I will show you a Bear Stearns stockbroker who just lost his own investments when the stock dropped from $120 to $10 a share. If you pay off your mortgage first,and don't have credit card debt, then its okay to invest as you please. I have lots of clients who have done that. I put that in the category of paying your bills first, and then going shopping.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Hi Marge,

My reaction to not paying off the mortgage is that its a good idea to pay it off.

I agree... but only AFTER you have enough money reserved to do so safely. Trying to tip-toe across "the home equity minefield" while putting your liquid net worth at risk of loss isn't wise if you can't afford those losses.

Once you have sufficient financial freedom to basically "self insure" against unforeseeable real estate losses, then wiping out the home mortgage is a nice "treat" to be enjoyed.

Show me anybody that actually took the money they would have spent on the mortgage who invested it intelligently and I will show you a Bear Stearns stockbroker who just lost his own investments when the stock dropped from $120 to $10 a share.

I could show you dozens who have (and are) safely managing and growing their equity without the risks of losing it in real estate.

How many individuals do you really personally know who went from $120 to $10 in BSC stock?
(And do we really want to be holding out stock-investor types as the "safe money management" bellwether? Seems to me these types would be just as ready to throw their longterm conservation cash against property equity as high-flying stocks... ESPECIALLY in SoCal.)

SOME people don't mind putting their retirement at risk for "emotional reasons" of some kind or another. I'm just more conservative than that... not into losing, do most anything to make sure that isn't even a remote possibility.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Don't Prepay Your Mortgage [Consumer Reports]

I dunno about that "reasons to carry a long mortgage" article. I can't decide which makes me cringe more...

This:
"Theres no way you can avoid debt in todays society. Cars and college let alone big screen TVs virtually require you to have loans."

Arrrrrrgggh!

Or this: "If your mortgage costs you 6% and you earn at least that much from your investments, then you can easily generate enough income to help you handle the new mortgage payments. And over time, your investments may earn more than what the mortgage costs you."

Some monster scale "if" and "may"s in there. If you run with this logic headlong into a bear market or recession, you lose the cash and still have the mortgage.

Me, I couldn't be happier to have chosen to pay off my mortgage. My portfolio is feeling the pain but come what may, I have the roof over my head. And I sleep well under it.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

My idea is to pay off the mortgage as you go--not borrowing money to do it, but not continually taking new loans or equity lines against it. I often see people who have refinanced and taken cash out plus paying off a car loan and credit card debt. That would guarantee you will not pay it off in your lifetime.
Their theory is the same one thats advanced so often--home loans are low interest and it makes economic sense to do it.The problem is I think that it encourages sloppy money management, and an endless circle of mortgage payments. Its sad that today many elderly people are forced to move from their homes because at retirement its hard to make a $1200 a month mortgage payment.
The Bear Stearns people I was talking about had that stock in their retirement accounts.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

I fall right into line with Marge's approach. That's what we did. We rounded our monthly payment up to the next "even" hundred and stipulated the extra was to be applied to the principal. We added a "13th. payment" yearly and applied that to principal, too. It was PAINLESS, all we had to do was figure out the "chump change" we needed to set aside to do it and then stick with the program! We believe that is the basis of sound money management.

When we decided we wanted to build a garage we sat down and crunched the numbers. We decided on a comfortable payment, put down some cash, and used a portion of our accumulated equity to finance the project for 15 yrs., at a fixed rate. We round up, pay to principal, and believe that an investment in ourselves is probably the best one available.

We were both raised to live below our means. We grew up in houses where things were "recycled" (we wore "hand me downs" and ate leftovers) and major purchases were carefully considered against the "want and need" scale. I think building wealth requires strict attention to detail and we don't regard our home as an ATM. We have used a portion of our hard-earned equity wisely, within an acceptable "risk range" for us.

There was an interesting quick story about Muriel Siebert on the news last night... she now works tirelessly to teach kids the simple basics of sound financial management. Anyone remember when they used to teach that in Home Economics? I do!


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RE: Don't Prepay Your Mortgage [Consumer Reports]

"Theres no way you can avoid debt in todays society. Cars and college let alone big screen TVs virtually require you to have loans."

What???? The ONLY items on which I've ever had loans (read: paid interest) are one car (out of three I've bought), and two houses. I've never paid even $0.01 interest on a credit card.

I financed the first car I bought, in 1987, on a 3-year loan, and kept the car another 3 years. I paid cash for my last two new cars in 1993 and 2001. Big-screen TV? I paid $7,000 for a plasma TV over five years ago, on a one year no-interest deal ... but I could have paid cash. The only reason I "financed" it was because of no interest. The first house I bought in 1991, I paid off the 15-year mortgage five years early. I bought another house in 2005, with SIXTY-THREE PERCENT down (savings and proceeds from sale of the first house). I accelerated that mortgage for the first two years by doubling the payment, which put an additional $700 to the principle every month. I've stopped doing that now after losing my primary job last April (still have a "secondary" job). I have more than enough savings to pay off the balance, which I've considered doing so (and may at some point). However, my mortgage rate is reasonably low, and I prefer the security of having my savings under the current circumstances.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

I may no ever pay of my mortgage, but why do I care?
I do invest my money carefully and have a good cash flow income and equity. I have no concern about being forced to move out of my home in my old age. I would be more concerned if I felt under invested for my future. Inflation scares me more than my mortgage payment.
I do know people that paid off their mortgage and now find themselves in a tight position. If they had taken that money and invested it, they would probably have more money today.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Well, we are on a middle ground here. We refinanced to a 30-year mortgage a year ago without taking cash out. We did this solely to stop tying up so much of our cash flow into paying off a 15-year mortgage. We have a large amount of equity in the house but not a whole lot of cash. We are frugal -- live very modestly, don't spend a lot of money -- but we have been putting the max into retirement accounts (401k, 403b, Roth IRAs) for quite a while now. So we have been saving more than the difference between the two loans since the refinance, and now have about 10 months' expenses in cash in the bank. We would like to maybe double that and then, perhaps, start doing after-tax investing.

I feel so much better about our financial situation now. The thing is that our mortgage payment is very low, so I don't anticipate having trouble paying it if we run into a problem that involves major loss of income, and at the same time, we have more of a cash cushion as well. My goal is to be in the situation where we don't even have to think about tapping into our home's equity if we need cash.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Is it really better to always invest or save rather than pay down? What if you are older and almost living paycheck to paycheck and so can save/invest little...wouldn't it be best to reduce the debt? I'm a relatively recent lurker here, but would like clarity, as this is an area of great worry for me, a middle-aged, single first-time homebuyer. Since my 30 year fixed mortgage on my inexpensive home will have me making payments until my late 70's,I have felt compelled to pay what extra I could on the principal over the last 5 years, only reducing my loan about 2 years worth or so, so far. Unfortunately, I recently stopped extra principal payments reasoning that I need to focus more on paying down my hefty student loans. I am nervous about having all this debt! At any rate, I know that I will be forced to work until my mortgage is paid off...Given the circumstances, wouldn't it make sense to want to pay it off? Sigh, wondering if I'm doing it all wrong...Penny.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Hi Penny,

Is it really better to always invest or save rather than pay down?

Nothing is ever "ALWAYS" anything, of course. Paying your cash into your real estate equity rather than into safer, more accessible accounts, or accounts with principal protection guarantees, is primarily an emotional benefit for those who choose to do so. For these folks the emotional "feeling" is more important than the actual financial security... and that is FINE when the choice is made with eyes wide open to the risks of only getting halfway there and being trapped with remaining payments and no income or savings.

What if you are older and almost living paycheck to paycheck and so can save/invest little...wouldn't it be best to reduce the debt?

If you are older and living paycheck to paycheck then SAFETY RESERVES are exponentially more important than reducing your debt prematurely. CASH IS SAFETY... when you are swimming in excess cash, THEN you can safely eliminate the longterm debt.

I'm a relatively recent lurker here, but would like clarity, as this is an area of great worry for me, a middle-aged, single first-time homebuyer. Since my 30 year fixed mortgage on my inexpensive home will have me making payments until my late 70's,I have felt compelled to pay what extra I could on the principal over the last 5 years, only reducing my loan about 2 years worth or so, so far.

All of that hwile still living paycheck to paycheck? (Or was that a hypothetical of somebody else?)

Far better to build up your safety reserves as fast as you can. A surprise stoppage of income for an extended period of time can never be "saved" by partially reduced debt... but accumualted cash CAN save your hide.

Unfortunately, I recently stopped extra principal payments reasoning that I need to focus more on paying down my hefty student loans. I am nervous about having all this debt!

Accumulate cash first, at least until you have enough safely saved to pay all of your total living costs for at least 12 months if you found yourself unemployed and without supplemental income sources.

Once you have that safety net underneath you, THEN if you emotionally must, you can begin chipping down the debt balances.

If you ultimately die in debt but never without the ability to pay... that is better than trying to live without cash but only partially debt-free.

At any rate, I know that I will be forced to work until my mortgage is paid off...Given the circumstances, wouldn't it make sense to want to pay it off? Sigh, wondering if I'm doing it all wrong...Penny.

It only "makes sense" emotionally, not financially. Go for safety and security FIRST, and you can go for the emotional good feelings later, when you can safely afford them.

Good luck, and welcome to the boards!
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Don't Prepay Your Mortgage [Consumer Reports]

peegee, I'd pay off the student loans before paying extra on a mortgage. The student loans are yours forever, but the mortgage, not necessarily. Most people do not stay in one house for 30 years or, even if they do, do not keep the same mortgage for the entire time.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Dave and Harriet - thank you so much for your responses! Here's a bit clearer picture; yes, I am living pretty close to paycheck to paycheck now. I sold an asset a few years ago, however, and while I had it used some money nearly every month toward mortgage principal and extra on my student loans. (still owe $20,000 on SL) I also opened a 403-B (?) and lived off my principal for ?7 months while contributing my paychecks, and opened a separate smaller IRA. I paid about half of a new basic economy car cash so the remaining payments would be manageable, and put about 10 months expenses in CD's. For the last year or so I've been back to living nearly paycheck to paycheck, and for awhile was still scraping together what I could-some months as much as 100 to 200 and putting on mortgage principal until it recently occurred to me that I need to get out from under the SL, and began putting that money on on that debt instead. Now I listen to what you are all saying about a cushion, and truthfully, what I have is not enough, because I will be needing a new roof in a couple years, and I have no savings toward that or another car or even car repairs. All I kept thinking is I've got to keep paying more on the SL. Thank you thank you thank you; I AM obtaining clarity on what I need to do. I think I will continue to add extra to the SL, but only maybe $50 - 75 a month when I can, and use anything left to start building more savings. Just saying that feels like a relief!! Harriet, you wrote: "Most people do not stay in one house for 30 years or, even if they do, do not keep the same mortgage for the entire time". I figure I am stuck here, as I don't see any way of affording to get out, but, at the same time, I am ever so thankful to have a home. I think I need to not focus right now on how I will manage in the future, but continue to live frugally and hopefully make the most informed decisions, like SAVING!!. Thanks again. Penny G.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

peegee, I think what Dave was saying is that you shouldn't even pay extra on the student loans until you have enough emergency and "life happens" savings built up. Pay only the minimum required until you have enough to see you through stuff like that -- that's what the loans are for. You might as well take advantage of them. And don't add more debt if you can help it.


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Harriet,
You are spot-on!

Penny,
Don't pay a.... 'penny' (sorry... perfect setup) into the FUTURE until you have enough reserves for TODAY!

Take a deep breath & meditate or pray on this;
Imagine how you will FEEL when you can look at your bank account statement, and see a balance of accumulated cash equal to at least an entire YEAR of your total living costs.

Imagine how you will feel knowing that you have the safety net underneath you to be able to NOT have a "gun pointed at your temple" for the next month's bills.

Imagine how you will feel with the realization you can take your own cautious time to carefully weigh-out your options on how to proceed between saving, investing, or eliminating your debts further.

Right now, you are trapped... you have no safety because you have no reserves.

Focus on RESERVES FIRST!

All the best,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Don't Prepay Your Mortgage [Consumer Reports]

Ok, so I was a little startled by your responses, Harriet and Dave, and did have to take a long breath and more than a few moments to let your words sink in, in order to realize that clearly my difficulty letting go of the idea of paying on the student loan (i.e.; my decision to pay "less") indicated the level of my anxiety about having a mortgage into my late 70's and student loan debt well into my sixties. (Even just saying that still makes me cringe!) The thought of not putting my all toward the goal of reducing debt truly feels foreign and wrong, as I was taught DEBT = BAD...But in processing this, I also am beginning to realize that the level of my anxiety about my future probably has been magnified many times by the fact that I don't have enough of that safety net for right now, and yes, Dave, if I visualize "a balance of accumulated cash", I do feel less vulnerable. The gun HAS been pointed at my temple, and I have been reacting out of fear. I will begin with my next paycheck taking better care of me by focusing on building my reserve! (And Harriet, I agree with you: "don't add more debt if you can help it"; that is why I'm still living in the dark ages without a cell phone and have a wire and tinfoil on my tv--but my five stations are free!) Thank you Dave for this thread and your responses; thank you Harriet for not letting me off the hook!


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